Selling Property Shares in France

The hot topic at the moment seems to be buying and selling shares in French property. The usual French structure for this is a SCI (societe civile immobiliere) which is a simple company specifically designed so that two or more people can own shares in a freehold property. In fact most SCIs will be “Fractional Ownership” so there is nothing new in this.

Most SCIs are set up and owned by people who know each other , very often family groups - the advantages are important when applied to inheritance tax, wealth taxes and other matters affecting something which is very dear to the heart of every French person - their “patrimoine”, their cultural inheritance and nothing is closer to their hearts than land and property.

Here is an exchange of mail I had today which focuses on an important point in owning a property in a SCI.

==

Dear Tony,

I’ve been following your website for some time and have just subscribed to your newsletter. I have the utmost respect for the care and thought you’ve put into the prospects for fractional share ownership of properties in France. You have no reason to respond to my question because I am not now looking for a fractional share property — but here goes.

I am perplexed. My husband and I own 50% of a property through an SCI. The other shareholders are another couple whom we’ve known for years. On our French accountant’s advice and to avoid the possibility of the SCI’s engaging in the rental of a furnished property, we have commodats formally filed which permits the right to possession of the property in one-year segments, changing mid-way through each year. My year starts in the annees impaires and the other woman’s right to possession starts in the annees impaires. We rent the property. The rental revenues and expenses of the property (other than mortgage) are paid by us as individuals, not the SCI.

We are relatively comfortable with this situation because the SCI is clearly not renting the furnished property — in fact,the SCI does not even own the furniture and never has.

However, recently our partners (co-shareholders) informed us that they would like to sell their share of the property and my husband and I are evaluating what to do. Previously, you seemed to be very wary of renting the property owned by an SCI in any way. Now, your new website does not seem to express such caution. I have been following your dialogue with Andy Sirkin and also don’t expect you to give me legal advice (I’m a lawyer myself anyway), but I would appreciate knowing your current thinking and also would appreciate your pointing me in the right direction.

My husband and I are specifically concerned that perhaps allowing our partners to put their shares in the property on the open market would preclude continuing to rent the property — which has been very important to keeping our expenses down and making our ownership of the property a non-frivolous venture. We are afraid that offering it for sale would make it appear more like a commercial venture rather than two couples who are friends sharing the property together despite the commodats (which are like common-law bailments in a legal sense)we have filed. We would undoubtedly file a new commodat substituting the new owner and sell the share of the personal property separately from the sale of the real property.

I’d really appreciate your current thinking on the matter and will promise not to rely on it if you would be so kind as to just give me your opinion and/or any direction to other expertise that you can suggest.

Thank you in advance for your response.

Lynda

===

Hello Lynda,

Thank you for your mail and for your understanding that I am trying to make a little clearer some of the things which concern the owning and renting of property in France. I always recommend that people get proper legal and/or financial advice from insured professionals capable of answering these points.

Much of the misunderstanding and legal/taxation problems I see are mainly due to cultural and comprehension differences between the French and what they call the “anglo saxon” mentality. The way anything like this has to be done is the way that it is done in France.

My current understanding is that a SCI, if it is seen as a trading entity, will attract a lot of tax liabilities - my thoughts and understanding of this have not changed for several years.

The way you are using the SCI, for your own purposes, seems reasonable and it does not appear that the SCI is in fact “trading” - as long as the SCI is simply the way you share the ownership and as long as you openly declare to the French authorities and French revenue that this is what you do and who the owners are and as long as the income you derive personally is declared and taxes paid (this can be in your own country as long as there is a taxation agreement in place) then I believe this is OK.

My conversations with Andy Sirkin are focused on the implications of Fractional Ownership where the SCI is usually owned by another trading entity (a LLC or Homeowners Association in America or a Limited company in the UK for example) - this structure will make it more susceptible for the French authorities to consider the activity of the SCI as a commercial enterprise and they may see the overseas company as a device to avoid tax on share transfers, Inheritance tax and income taxes - if this is considered a “device” in this way then all hell could be let loose and big penalties incurred by the owners of the shares in the property.

Assuming that you do not wish to buy the other shares yourself (normally you have the right of first refusal), I do not see that the other half of the shares of the SCI being sold to other people will change the situation. Your partners will have to pay a transfer tax and Capital Gains Tax on the sale of the shares. You will still declare the ownership of the SCI to the authorities and maintain that it is a transparent, non trading company so there should be no problem.

The best person to get an opinion from is likely to be Andy Sirkin who is immersed in this specific question and has a wealth of experience in these matters (he is also a very nice and straightforward gentleman).

Hope this helps - do let me know how you get on as this may help others.

Best wishes

Tony